Features

BOSTON — With little to celebrate lately, businesses in the $25 billion data-storage industry are looking for some gains from the confusion over the planned merger between Compaq Computer Corp. and Hewlett-Packard Co. 

Compaq and HP have pointed to data storage as a key area for providing “one-stop shopping,” blending HP’s high-end storage products with Compaq’s mid-range and so-called Storage Area Networks. 

But rival EMC Corp., hit hard by the business-spending slump, insists it will be the real beneficiary. 

At a recent industry conference, EMC Executive Chairman Mike Ruettgers predicted the merger would tie the two companies in knots for months, if not years. He said frustrated customers who had been looking for cheaper deals would return to the EMC fold. 

For smaller companies, there are worries that a merged HP and Compaq could further crowd them out in the long run. 

But in the short term, the merger, coupled with thousands of recent layoffs at EMC, could cripple the big companies’ customer service, making room for the smaller businesses. 

“There’s always room for somebody who gives the right kind of hug to the customer,” said John McArthur, a vice president at research company IDC, based in Framingham, Mass. 

McArthur said he has recently heard from customers who have been happy with smaller companies, like privately held XIOtech, based in Eden Prairie, Minn. In lean times, McArthur said, customers “will basically take anybody who can solve their storage problems.” 

The data-storage industry provides the hardware and software used in such data-heavy systems as airline reservation and insurance. 

Its phenomenal growth in the 1990s led to a flurry of research and development and a broader focus: products that not only store information but also manage, organize and exchange it with other systems. 

But the last two years have been rough. IDC projects a 1.7 percent decline this year in total storage spending, before the industry picks up with a 5.2 percent increase in 2003 to $26.3 billion. 

EMC, after more than a decade of consistent profitability, has lost money in two consecutive quarters and laid off 4,000 workers last year. Its stock, which traded at more than $100 a share in 2000, is trading at about $11. 

The company hopes to return to profitability this year, but some analysts believe that will require further layoffs, and several have cut their earnings outlooks in recent weeks. 

Getting a snapshot of the industry is difficult because the companies disagree over which statistics matter most. 

Compaq prefers IDC’s measurements for total storage revenues, where it leads. But because EMC doesn’t make PCs or servers, it focuses on markets where it competes. EMC led the external-storage device market in 2001, and a combined HP and Compaq would still be smaller than EMC. 

Compaq shareholders overwhelmingly approved a $19 billion buyout by HP last month. 

HP has claimed that a preliminary tally showed the deal had been approved by a “slim but sufficient margin.” But director Walter Hewlett has filed a lawsuit accusing HP of improperly enticing a big investor to back the merger. 

The merger, if it goes through, could shake up the data storage landscape. 

“I do think companies like the concept of one-stop shopping for storage,” said Mike Winkler, Compaq’s executive vice president. “Therefore breadth of offering is important, and the strength of your offerings is vital.” 

EMC insists any gains for the merged HP and Compaq will be canceled out by the integration costs of the merger. 

“You can guarantee if you use both of those companies, you’re going to be obsoleted on some of the products you use,” Ruettgers said last month at the TechTarget Storage Management Conference in Chicago. 

Ken Steinhardt, EMC’s director of technology analysis, said the effects are already being felt. 

“We’re seeing customers now that have historically that have been dyed-in-the-wool Compaq customers or dyed-in-the-wool HP customers that are now looking broadly for (other) technologies,” he said. 

Small companies — at least those that have survived the recession — say customers are also antsy about the merger. 

“Customers bring it up with us. They’re a little concerned, they don’t know what’s going to happen, and they’re afraid to make new commitments,” said Scott Robinson, chief technology officer at Datalink in Chanhassen, Minn. 

Datalink doesn’t make its own hardware and software, but puts other systems together and gives advice. The last few years have been tough, Robinson said, and he is worried about the long-term effects of a merged HP and Compaq. 

But for now, he’s pleased. “Short term we see it as an opportunity, because there is certainly going to be some confusion,” he said. 

But Compaq’s Winkler insists his customers have been, and will be, loyal. 

“We’ve published a lot of the wins that we’ve had since the announcement of the merger,” he said. “The business has been as strong as it has ever been.”